Audit Committee Accounting Expertise and Audit Quality – the Case of Going-Concern Opinions

Gnanakumar Visvanathan

doi:10.5430/afr.v10n3p27

Abstract

This study examines whether audit committee accounting expertise and other audit committee characteristics promote or deter the likelihood of receiving going-concern reports from the auditors and whether such characteristics shield auditors from dismissals after the issuance of a going-concern report. The study finds no significant association between the likelihood of a going-concern report and audit committee accounting expertise or other audit committee characteristics. No significant association is also found for auditor dismissals following going-concern reports and audit committee accounting expertise. These results contrast with prior literature that examined data preceding the passage of the Sarbanes-Oxley Act of 2002 (hereafter SOX) or the period immediately thereafter. Additional analysis shows that audit committee accounting expertise is found to improve the information in going-concern audit opinions by reducing Type I errors, however. Overall, these findings shed light on the evolving role of audit committees in overseeing the auditors and have implications for regulators interested in improving audit quality and investors interested in improving the effectiveness of audit committees.

Highlights

The role of audit committees in protecting the credibility of financial reporting and auditor’s reporting behavior has been studied extensively in the accounting literature. Carcello and Neal (2000) find that the greater the percentage of affiliated directors on the audit committee, the lower the probability of auditor going-concern opinions. Carcello and Neal (2003) report that audit committees with more independent directors and higher governance expertise, shield auditors from dismissals after the issuance of new going-concern opinions
The results show that after controlling for variables that influence the likelihood of receiving a going-concern opinion, there is no significant association between the probability of receiving a going-concern opinion and the presence of an accounting expert on the audit committee
The results show that other audit committee characteristics such as governance expertise (GOVEXP), the tenure of audit committee members (ACBRDTEN), and audit committee directors’ share ownership (ACOWN) do not play a significant role in the reporting of going-concern opinions

Summary

Introduction

The role of audit committees in protecting the credibility of financial reporting and auditor’s reporting behavior has been studied extensively in the accounting literature. Carcello and Neal (2000) find that the greater the percentage of affiliated directors on the audit committee, the lower the probability of auditor going-concern opinions. Carcello and Neal (2003) report that audit committees with more independent directors and higher governance expertise, shield auditors from dismissals after the issuance of new going-concern opinions. The study makes the following contributions to the literature: first, by answering the call for research on auditor going-concern opinions and audit committee characteristics (Carson et al, 2013), the study finds evidence that differs from prior research underscoring the evolving role of the audit committee characteristics and auditor reporting behavior. The study finds that while accounting financial expertise of the audit committee does not play a role in going-concern opinions and subsequent dismissals of auditors, it improves the information in audit opinions by reducing Type I errors. This finding has not been documented previously and extends the literature on the role of audit committees in improving audit quality. The final section provides a summary and notes limitations to the study

Hypotheses Development

Research Design

Sample Description and Empirical Results

Findings

Conclusion